Pierce Group AB (publ) (PIERCE) Earnings Call Transcript & Summary

Welcome to the Pierce Group Q4 2024 presentation. [Operator Instructions] Now I will hand the conference over to the speakers, CEO, Goran Dahlin; and CFO, Fredrik Idestrom. Please go ahead.

Good morning. This is Goran Dahlin, CEO of Pierce Group. And with me is Fredrik Idestrom, our CFO. So before we go into the results of the quarter, I would like to spend a few minutes on Pierce and the market we're working in. Pierce is a leading e-tailer in the European market for gear, parts and accessories for motorcycle driving. The total European market was estimated some SEK 100 billion in 2021. the market is fragmented, mainly served by traditional offline retailers while well suited for e-commerce. And we judge that it's highly likely that the market will consolidate as there are significant economies of scale. Pierce is a clear leader in the offroad segment and one of the larger e-tailers in the onroad segment. We're also the only true pan-European company in the industry with a local presence in 16 markets. And we have a uniquely attractive assortment, offering a wide range of top brands with the largest range of own brands in the market. We have a turnover of approximately SEK 1.6 billion and have 320 employees across Europe. To the right, you can see some basic information about us. 2/3 of our sales are outside the Nordics. Almost 2/3 is Offroad, 1/3 is Onroad and 5% is Other, which is primarily Sledstore. Parts and accessories are each roughly 20%, and a little more than half of the sales is gear. Own brand share is approximately 40%. Next slide, please. The market is divided into three segments: gear, which is everything that you have on the body when riding; parts, which is anything installed on or in the motorcycle; and accessories, products used with the motorcycle that are not mounted. We also sell streetwear, which is motorcycle-themed clothing from motocross and motorcycle brands. The online market in 2021 was estimated to 19% of the total SEK 100 billion market. Since post-COVID, the market has declined in size but there is no official market data available. The products we sell are well suited for e-commerce, which is one of the reasons why online is expected to grow faster than off-line. Another important growth driver for the online is that online can offer much wider selection and better availability, which provides superior convenience for the customers. Also, a growth driver for the industry at large, long term, is that the base of motorcycle riders are increasing. Next slide, please. The competitive landscape is fragmented and constituted on five different segments: leading online retailers, such as ourselves, 24MX and XLMOTO; general diversified online retailers and marketplaces such as Amazon and eBay; leading European omnichannel retailers, which have their sales split in similar portions between physical retail and e-commerce; the traditional brick-and-mortar, typically small local physical players, many of them have, since COVID, online presence; and direct consumer, a small segment where the brands in the market that mainly sell to distributors also have a direct-to-consumer channel. Our main competitors are 8. I will not go through all of them but state some of the key points for Pierce. Pierce is the largest e-commerce player in the market. We are the champion in the Nordics and we are clear leaders in the offroad across Europe. Pierce is also the only pan-European player with local sites in 16 countries with local language, local payment options, customer service and local delivery partners. We're also the only player with a pan-European long-haul logistics setup with Pierce's dedicated long-haul transportation across Europe that delivers product into the local injection points. The other players are primarily local champions in the main European markets, most of them onroad. Several of the direct competitors or the major players have financial owners, which we believe will facilitate the future market consolidation. Next slide, please. And now going into the results. Looking at 2024, this was the year where we took the first transformative steps in adjusting our strategy and business model to enable future growth and profitability. We have three targets for 2024: number one, get back to profit; number two, get back to growth; number three, make significant progress in the transformation of the company. And I must say that the team is just as proud as I am that we have succeeded with all of these three objectives. And it's with great pleasure that I present a quarterly report that once again shows a positive adjusted EBIT, albeit at a very modest level. Having said this, the road ahead is still long and it's bumpy. It's fair to expect that we will suffer from temporary setbacks due to the current accelerating uncertainty driven by the geopolitical situation as well as our very ambitious change agenda. Turning into Q4. Q4 is a very campaign-intense quarter and the result depends heavily on the performance of the Black Week and Christmas campaigns. The consumer sentiment was still weak in Q4. Our growth was primarily related to a different approach to purchasing and campaigning than last year's Q4. We were able to show a good profit -- good growth in spite of a weak consumer sentiment and the lack of snow, which made our snowmobile segment very challenging. And the bad snow situation in the Nordics continued. In Q4, we gave priority to gross profit in absolute terms and to reverse the trend of declining customer base. This was successful. But as a consequence, the gross margin in percentage decreased versus last year with 1.5 percentage points. Our adjusted EBIT improved from minus SEK 7 million last year to plus SEK 1 million this year. A transformation of our magnitude comes with numerous turnaround initiatives, such as a new leaner organization and operating model, a consolidation of our brand portfolio, a massive upgrade of our tech stack and a strong push to improve the health of our inventory. Such initiatives are associated costs that are nonrecurring -- or have associated costs that are nonrecurring in nature. This makes the like-for-like comparison to past performance more complex. Obsolescence, transformation costs and brand depreciation are impacting our adjusted EBIT in Q4. Our overhead costs for the quarter increased from SEK 72 million to SEK 76 million, and Fredrik will go through this later in the presentation to create clarity of the underlying profit for Pierce. The outcome of the efficiency program from end 2023 mitigated the effects from underlying inflation, which has been quite significant, especially in Poland with very high minimum salary increases, and the investment in modernization of our IT infrastructure. We have today 200 white collars versus 250 one year ago. We have during the quarter also had some onetime costs related to some role adjustments in the quarter. At the end of the quarter, our cash position stood at SEK 297 million. This is a quite high amount of cash for our size. However, this will change. We are very seasonal and we are now building up stock for the high season. This includes stocking up to mitigate some of the availability issues we had during Q2 last year, together with building stock for the largest private label launch we've done probably ever in Pierce. Looking ahead, we see that the accelerating uncertainty of the global geopolitical situation risk to further weaken the consumer sentiment, which makes forecasting very difficult. Next slide, please. Looking at some of our key performance indicators. We have a strong own brands offering. Our LTM private brand share was 39% compared with 40% in Q3 last year. Looking at the Trustpilot scores, which we use to track customer satisfaction, this continues to be on a high level across Europe. And we even show a slight increase, which is very satisfactory. Next slide, please. As you can see here from the chart on the left, the active customer base showed an increase in Q4 LTM for the first time since 2022. I must say that this is very encouraging as this has been our top priority, to turn around the decline in customer base. Having said that, it's promising but we still have a long way to go. To the right, AOV decreased a few SEK LTM as a consequence of the more ambitious growth approach in Q4. I now hand over to Fredrik.

Thank you, Goran. Good morning. This is Fredrik Idestrom, and I'm the CFO of Pierce. So Q2 and Q4 are seasonally the largest quarters for us. Q4 showed strong growth as we took a much more ambitious approach to purchasing and sales versus last year when we were conservative ahead of the campaign season with declining year-over-year revenues of 10% as a result. As Goran mentioned, including Q4, we also see that our LTM net revenue grew with 6%. Looking at quarterly development back to 2019, which by many is considered the last comparison point prior to the pandemic, we can see that we have had a fairly even 6% CAGR across the quarters. Margins have further improved versus the low point in 2022 as focus has shifted from cash towards profit. Growth in Onroad was clearly higher than Offroad in Q4. And from a market perspective, Sweden was the weakest market and, outside the Nordics, the strongest in the quarter. We continued also in Q4 to improve profit after variable cost versus previous year, which grew 16% year-over-year. Q4 in both years were positively impacted by obsolescence provision effect of approximately SEK 5 million to SEK 6 million. To explain further development in unusual items, we turn to the next page for a deeper look at the key components. As Goran mentioned, adjusted EBIT increased from minus SEK 7 million in Q4 2023 to plus SEK 1 million in Q4 2024 and from minus SEK 69 million to plus SEK 25 million for the full year. Adjusted EBIT in Q4 was impacted mainly by three unusual items compared to last year, as Goran mentioned in the summary. The first one is the changed assumptions in our model for calculating provisions for obsolete stock. This resulted in a significantly increased provision for slow-moving inventories of around SEK 44 million in Q3 2023. In Q4 2024, the positive effect was SEK 5 million and SEK 19 million for the full year. Amortization of trademarks of the discontinued own brands we announced in Q3 2023 also impacted adjusted EBIT. The effect in Q4 was SEK 2 million and the full year effect was SEK 7 million. We will continue to amortize these brands until the second quarter 2026. The third item is the estimated transformation cost. So as Goran mentioned, the transformation we are in is driving additional costs. And looking at the estimated cost attributable to external consultants and costs for systems not yet in use, we estimate the impact to be SEK 6 million in the fourth quarter and roughly SEK 10 million for the full year. And this does not include own personnel but only external resources. So to the left on the slide, we illustrate the adjusted EBIT also excluding the three effects I mentioned to better explain the development and what profit looks like excluding these unusual items. And adjusted EBIT excluding the items was approximately SEK 4 million for Q4, so slightly above the reported adjusted EBIT, and SEK 23 million for the full year, which is more or less the same as the reported adjusted EBIT. Looking at the gross margin trend to the left on the slide. We see this quarter and versus the same quarter previous year. As Goran mentioned, in the Q4, we prioritized maximizing gross profit in absolute terms and turning our customer base development positive, which led to higher revenue growth but a slightly lower gross margin. 2024 has also, as I mentioned, been positively impacted by obsolescence provision reversal, which are explained in the slide. Shipping costs in relation to revenue was 0.5 percentage point higher than 1 year ago in the quarter and 0.9 percentage points higher than the previous quarter. This is related to a mix of the products sold, where we sold a higher share of products with high in-freight costs as well as the higher shipping rates in the market. As we have mentioned in previous calls, we have seen a higher volatility and higher shipping costs during 2024, which have now materialized in the P&L in the fourth quarter. There is a risk for potential further volatility and increases in the market given the geopolitical situation, and we continue to monitor this closely. Overhead costs increased in the fourth quarter versus previous year. Although the efficiency program we initiated at the end of 2023 has mitigated effects such as underlying inflation and transformation costs, the net impact in the fourth quarter was an increase of OpEx. And as I mentioned, quantifying transformation costs can be done in many ways. And we have -- looking at the cost for external consultants and costs associated with systems not yet in use, we estimate these costs to be around SEK 10 million for the full year and SEK 6 million in the fourth quarter. And this does not include cost for own staff. We expect the transformation and costs associated with it to continue throughout 2025. Net working capital at the end of the fourth quarter was at a similar level as the same quarter last year and slightly lower than Q3. And as Goran mentioned, we expect stock and net working capital to increase going forward due to seasonal effects and to ensure availability before the season start and capture growth opportunities. Our financial position remains strong with close to SEK 300 million in net cash at the end of the quarter. I will now hand over to Goran again for some final remarks.

Thank you, Fredrik. So we have identified seven strategic objectives that guide our efforts on our journey to reach our vision to become the undisputed leader in e-commerce for motorcycle equipment accessories across the European market. So I would like to explain a little more on what we have done to achieve these strategic goals. And this is a lot about -- our agenda is a lot about excelling on the basics. Number one was to achieve uncontested leadership in the Offroad segment and drive profitable growth in the Onroad segment. What we've done during the year is to increase the number of MX riders in our organization, especially on positions where technical knowledge is very valuable. And this is to improve our technical assortment, where we have lost some momentum on ground in the last years. We have also rebalanced our marketing resources more towards 24MX. And we focus our efforts on XLMOTO, the Onroad segment, to the most profitable markets and the most profitable products. Number two is to attain the highest customer loyalty in the industry. We have -- we believe that customer loyalty is driven by excelling in the basics, having the right assortment, having the right availability, the right product information, short and reliable delivery times and a good customer service. We have done one of the largest improvement ever in our stock assortment. We have increased the number of stocked articles were close to 50%. And we now, by far, have the largest stock range in Europe. We have implemented a more amicable and swift way of treating our customers in our customer care. We have also made large improvements in the delivery transparency and track-and-trace capabilities. And we have launched our first-ever loyalty program, which was done in 24MX store. We also want to develop a more simple and effective go-to-market strategy. This is pending the new tech stack which will be launched during the year. We want to be the best in the industry in pricing and procurement, quite fundamental to a retailer. This is -- we have launched a new state-of-the-art pricing software at the end of 2023. We have implemented a new approach, working much more closely with our core suppliers to attain mutual gains. And we have changed quite a large part of the supplier base for our own branded products to achieve better cost quality ratio. We want to establish market-leading value-for-money own brands. We have consolidated our own brand portfolio from 8 to 3 brands to enable us to build real brands. And we are preparing for the largest expansion of our own private label assortment ever. We want to build a modern and scalable IT platform. The complete change of our tech stack is progressing well. We are implementing state-of-the-art modular and cloud-based systems. These exhaustive changes take time, and we expect this project to continue throughout 2025. And lastly, to culture a lean and agile organization. We have established a lean and agile organization through the reorganization we did in Q4, and the calibration of this, we did in Q4 2024. We are now getting much more done with white collar worker staff of 200 people rather than 250. So to finalize, looking forward, we see, number one, that the transformation that we have started will continue throughout 2025 with associated transformation costs. We see that geopolitical uncertainty is increasing. And this short term, we see that the outlook is very uncertain. The consumers are very price sensitive. However, we have a transformation agenda that we're working hard on. We're working hard to continue to excel on the basics, to improve on the basics and to drive growth. So we are fully focused on what we can influence, our operations and our transformation. And we remain fully committed to our vision and strategic objectives. Then we open up for questions. Thank you.

[Operator Instructions] The next question comes from Adrian Elmlund from Nordea.

I must say that it's very nice to see the double-digit organic growth. So congratulations. I have a couple of questions here. So firstly, like what drove the 20% organic growth outside of the Nordics? Can you maybe provide some insight into maybe any specific geographies contributed to that growth?

Yes. We had good growth in -- we can say that in the markets close to our central warehouse in the Northwestern part of Poland, which shows that the importance of delivery time is extremely high. And we have a high focus on these markets, and we also had availability situation that suited these markets extremely well.

Okay. Maybe a follow-up to that question. Do you have any plans to expand some warehouse, maybe to Spain or something like that, to have better delivery times throughout the whole of Europe?

We have looked into this several times in the history, latest last year. But then we had the idea of velocity centers set up where we have the high-moving products closer to the customer in Southern Europe. Our delivery lead times to Southern Europe is very long and it's difficult for us to be really competitive there. But the nature of our assortment, having a very high share of private label requiring container handling, et cetera, makes this not feasible from a profitability perspective. I think that one of the -- we talked about the potential consolidation of this industry. And I think the winner in this industry will, in the end, be the one that sits with 4 to 5 warehouses across Europe with being 3, 4x the size of any of the other competitors. That will be a super, super strong position from all angles. So my answer would be that if we want to have more warehouses, we need to -- that needs to be done through the M&A agenda.

Okay. Perfect. And also, maybe could you comment on the strategy, balancing sales and gross margin? Should we maybe expect similar trends throughout 2025? Is this like an active strategy that you plan to pursue moving forward?

Short answer is yes. We want -- we focus on two things, the gross profit in -- or the commercial profit in SEK rather than percentage. Naturally, it's a balance. It's never black and white. But the SEK has the priority, together with increasing our customer base. And we can say that what we see is the consumers are very price sensitive.

And maybe finally, a final question from me. Regarding future M&A, should we interpret the longer-term strategy of acquisitions as maybe more than 12 months out? Or what time frames are we discussing here?

It's very difficult to comment on time lines. I mean we are fully focused on transforming the company and getting back and increasing the profit of the company. So that's our priority. And then M&A agenda is -- there's always two parties. So it's difficult to give a time line on that.

The next question comes from Tommi Saarinen from Inderes.

Starting from the -- your work on the stock assortment. So will this impact your sales mix? And do you expect your sales mix to change going forward? And if yes, in what direction would that be?

Yes. We expect this to influence our sales as we believe that -- or we see clearly that the delivery lead time is extremely important. And when we do not have things in stock, that means that we either have to do a cross-stock maneuver, where we have twice the length in lead time to the customers and also twice the risk of errors and the errors are twice as severe. And we believe that our core customers that go out riding in the weekend want to fix the bike during the end of the week to be able to ride the next weekend. They do not appreciate delivery delays at all. So cross-stock is good in one way because we can offer a wider assortment. But we need to keep that to -- we need to ensure that we have the right assortment in stock. The other thing is that last year, we experienced some stock-outs, especially in certain categories and certain brands. And we have a much better stock situation there. And thirdly, we have -- we expect a big increase in our private label sales, if not this year, at least next year. It takes some time when you put new products in the market. And we do -- we put several thousand of new SKUs in the market from April. So we expect that to grow.

So you touched on fixing the bike. So are we talking about parts here? So is it right to assume that you're increasing your stocks specifically in parts?

Yes. That's correct. Parts is an area where we have -- as I mentioned, we have -- we've lost some ground in parts. We have not had, frankly, a good enough assortment of parts covering enough popular bike models, et cetera, both in external brands and in our own brands. But it's also actually some of the larger brands in gear where we've had -- and also a few very popular private label items and accessories that we had a stock-out situation last year. So we expect that to -- all of this to be positive.

All right. And then you mentioned in your report that you did discontinue some brands. So what was the logic behind this and in which product segments was this in?

Yes. This was primarily related to our private label where we have 8 different private label, very niche brands. And we see with the branding budget that we have, there is no way for us to put any resources in building those brands, especially considering that we have 3 store brands also and we are operating in 16 markets. So it becomes very fast, very small amounts in each market for each brand. So what we wanted to do is to focus on fewer brands. And what we're primarily doing is we're upgrading the assortment and we're also transferring the assortment from the discontinued brands to the brands that we have decided to go forward with.

All right. And then the last question from me. You say there's still a lot of work to do regarding your turnaround initiatives. So where do you see the most need for improvement?

We have done a lot. I would say that if I summarize this a little bit, it's to secure the basics, to become even better on the basics. We still have a lot left to do, and that, with the mindset of a businessman and putting the customer in the first position. I think when I joined 1.5 year ago, Pierce had lost a little bit of that culture. So that's one thing. And then, of course, the transformation agenda, changing the vast majority of our IT systems at once. This is -- it's not an easy task, but we have to do it because we have a quite big tech debt. So to enable our development, we have to have a modern IT stack.

The next question comes from Atte Jortikka from Evli.

This is Atte Jortikka from Evli Research. I have a quick -- a few quick ones, more on the procurement side. So you said that you chose a more ambitious purchasing and sales strategy in the Q4. I understand the part on the sales side, but could you open a bit more on what you did on the purchasing side?

Yes. That's actually that we built more stock than in 2023. In 2023, we were still -- we had very large issues with overstock situation. So we could not really buy that much attractive stock, but rather to try to get rid of the overstock and the old stock that we still have. And we've been -- we did a big increase of our obsolescence provision in Q3 last year and we really pushed out -- we have been pushing out the old stock during the year. So that meant that this in, 2024 Q4, we were able to have a better, more attractive products in the inventory. It's as simple as that, actually. And then we were much more aggressive when it came to the pricing and the campaign in Q4 than last year.

Yes. Sure. Then my last question. You talked of working more closely with our core suppliers. So does this actually mean that you're increasingly focusing your purchases on these core suppliers? Or could you open a bit more on this?

Yes. That's true. And that's also where we have made the biggest changes in our stock assortment. We think that strong brands, we see clearly that they drive a lot of traffic and make our -- coming to 24MX and XLMOTO very attractive for the customer. And then we have the chance to -- when the customer is in our site, we have the chance to sell -- try to sell as much as possible to them. So we have grown quite significantly more with the big brands versus the smaller brands that we have. At the same time, we need to have a wide assortment to be attractive. So we need to have a strong supply of niche brands also.

There are no more questions at this time, so I hand the conference back to the speakers for any closing comments.

Thank you for listening, and we wish you a great continuation of the day.